Tuesday, July 27, 2010

The market bounced around today as it tried to find a direction like scientists are trying to find the elusive "God particle" (though apparently scientists have figured out where it isn't which includes Jane Austen's writing, Bernie Madoff's bank account, and Jamaica. But newsflash Einsteins, you might want to check Brooklyn Decker's vagina because if the "god particle" isn't there, Nietzsche may have been right.).

Anyway, the big macro news was that consumer confidence fell to a five month low with consumers still worried about jobs, the potential death of fiat currency and subsequent return to the barter system, and Eliza Dushku's consistent refusal to do nude scenes. The index fell to 50.4 from an upwardly revised 54.3 and economists had guessed it would come in at 51, so good on them for almost correctly predicting one number out of the thousand they guess on yearly. That said, a drop in consumer confidence could lead to further declines in spending which is as good for the economic recovery as fat tails are for trying to forecast using gaussian assumptions, tickets to the Ford theatre were for Abraham Lincoln, or The World's Biggest Gang Bang was to Annabel Chong's pelvis.

In headline manipulatedly (and yes that is more of a rehetorical tautology than "free gift," "short summary," or "Kathy Griffin manly") positive macro news, the Case-Shiller home price index was up 1.3% on a non-seasonally adjusted basis, .5% on a seasonally adjusted basis, 4.7% year over year, and 30% in the land of make believe where every party is as delightful as a rainbow. Of course the numbers are more worthless than a hand job from a quadriplegic with carpal tunnel disease as the Case Shiller index uses a fucking three month average so inflated home sales from April due to the now expired the government tax credit are still in the numbers. What we do know is that home prices are at least 29% below their inflated peak from four years ago, foreclosured properties are at record highs, and Sofia Vergara is hot.

The market remains at a headscratchingly confusing time (though if it were Money McBags' head and Diora Baird doing the scratching, that would be a lot less confusing) with macro data continuing to be marginally bad at best and yet earnings coming in moderately good at worst. So which is the leading indicator and which is the lagging? It is a question that is proving to be a bigger conundrum than anything the Sphinx, Hamlet, or Andy Rooney ever asked (go to ~1:13 in the video).

In Europe, all but one of the 27 members of the EU agreed in principle to new BASEL regulations, with only Germany holding out as they wait for a bigger signing bonus, guaranteed playing time, and use of the EU locker room to entertain groupies during breaks in the negotiations. The new proposal is less onerous than earlier proposals and give banks more leeway to define what counts as Tier 1 capital potentially including stakes in other banks, future tax benefits, and monopoly money. Regulators are still debating the amount that banks will ultimately need to hold as reserves but Money McBags is pretty sure that whatever the number winds up being, it won't be enough for the next bubble.

Also internationally, Germany’s consumer confidence from the GfK institute rose to 3.9 but as Money McBags doesn't use the metric system, he has no idea what that means. That said, with Germany being Europe's largest and least funny economy, rising confidence can't be a bad thing.

In the market, DuPont (ticker DD) announced a good Q which was the second time today the market got excited about a set of double Ds with JWOWW having rung the opening bell. DD earned $1.17 per share, beating analyst guesses of $.94 eps as a result of 26% revenue growth driven by a 33% increase in emerging market sales. They also raised 2010 earnings guidance to $2.90 to $3.05 per share from $2.50 to $2.70 and told analysts to suck it.

Deutsche bank made analysts look like deutsche bags by putting up a big Q as well. DB posted a 9% rise in earnings despite weak performance from their investment banking business which had to take a quarter off from manipulating the market while new regulations were being discussed. That said, it was a good Q for the German bank who is still likely drunk and throwing out the saran wrap from their traditional German scat party as a way to celebrate having passed the europe bank stress tests last week (though the tests were about as vigorous as a Kirstie Alley workout video).

Finally, BP was down after posting a $17B second quarter loss thanks to creating the worse unnatural disaster since the Lohans failed to get an abortion24 year ago. And Apple will now be forced to allow third party software on the iPhones which means porn lovers everywhere just lost another 30 minutes of their day. The real purpose of the ruling by the copyright office is to allow iPhone users the ability to unlock their phones without any repercussions and thus have the ablilty to change their wireless service provider from AT&T to something that works a little bit better, like smoke signals, shouting, or semaphore.

In small cap news, CTGX reports tonight and Money McBags expects an inline quarter at best with EMR still a few Qs away. TSYS was up 4% plus and remember on 7/9 Money McBags said it was too cheap and would make a nice short term trade and it's up just under 20% since then so good for you if you picked up some shares but don't get too greedy as news on the company remains thinner than OJ's alibi and it has traded down for a year for a reason.

Last week EPAX, a small, overlooked, and horribly performing name which Money McBags thinks is an interesting company put up a Q as crappy as expected. Money McBags broke down this company in quite a bit of detail a few months ago but they basically arrange for international student travel so little Jimmy can lose his virginity to an Amsterdamian hooker all under the guise of educational experiences. The point is, the business sucks right now as if it were Jesse Janeon the set of Island Fever 4. The company sells expensive, completely discretionary trips to Europe in the biggest recession in 70 years when in the internet age all one has to do to spend a night in Paris is steal their neighbor's wifi signal. This last Q, gross margin was down ~15% and with operating costs flat at $12MM, eps was down ~20% to $.79 per share in what is traditionally the strongest Q for the company as it is right before the summer travel season.

Money McBags' estimate remains at $.49 eps for this year and the company released guidance for $.48 eps to $.52 eps (and yes, Money McBags' $.49 eps estimate was from way back in April when the street was still at ~$.60, look it up, so his 15 minute earnings model proved to be more precise than sell side analyst models which is less surprising than finding out that Gary Colemn didn't live to age 50). The point is, the company is still struggling with enrollments down 17% and their recently launched Discover Adventure travel progam having underwhelmed like a bachelor party in which Mayim Bialik jumps out of the cake (or more precisely, eats her way out).

So why the fuck would Money McBags be interested in a company whose EPS is going to decline by 50% and is trading at >20x current year guidance? Simple, volume. Well, actually volume has little to do with it but cash does. The company has $53MM in deployable cash and a market value of $210MM so ~25% of their value is in cash or roughly $2.50 per share. Not only that but this company can scale quickly as they are already running a lean operation and until this year were able to maintain $1 in earnings power.

So the upside is that people become a little less freaked out about the economy in a year, EPAX buys back shares with some of their cash, and Hanna Hilton comes out of retirement and offers her fans free ice cream sundaes for continuing to have supported her in her down time (and yes that has very little to do with EPAX, but whatever).

This company is an interesting way to play a recovering economy and while Money McBags doesn't think that is going to happen anytime soon, it is a cheap way to hedge one's negative bets. Money McBags doubts the stock does anything for at least another 3Qs and he doesn't own it nor is he going to buy it, but it pays ~2% yield and is one way to play a market recovery with some downside protection.

About Me

Money McBags is the preeminent financial humorist and money maker in the world. While known for his ability to find and invest in undervalued equities, Mr. McBags is also a world class dick joke teller, an aficionado of lovely ladies, and avid reader of books without pictures in them.
With buyside experience, a CFA charter, a degree in economics from a top ten university and an MBA in finance from a top 3 business school, Mr. McBags is here not only to help you make smart investment decisions, but also to make investing fun.
** Big disclaimer: Mr. McBags is not currently associated with any fund (if he were he wouldn't be giving stock picks), so all of the ideas on this blog are his and his alone. Laugh at the jokes, ogle the pics, and enjoy the research/opinions, but as always, do your own work.